Don’t Play Chicken With Tyson Foods

While Turkey Day might be the highlight of this week, it’s chicken and beef that Tyson Foods (NYSE:TSN[1]) shareholders are most thankful for.

On Monday, the meat producer reported a top-line miss but reported adjusted earnings per share of 55 cents, well ahead of the consensus estimate of 46 cents. Gross margins also surprised on the upside, coming in at 6.8% versus 4.7% a year ago — a major positive considering the largest concern, back in the summer, was that rising corn prices[2] would destroy the company’s margins.

The result: Tyson shares jumped from Friday’s close of $16.88 to $18.72 on Monday, a gain of almost 11%, and was making further progress Tuesday.

Right now, the news is all good for Tyson. The company has been able to thrive — and not just survive — in a year of rising corn prices. As CEO Donnie Smith said in a post-earnings statement: “Thinking about what we’ve accomplished over the last three years in a sluggish economy with unfavorable market dynamics and staggering input cost increases, it really is impressive.”

And that’s not all — Tyson is cutting costs, reducing debt and growing its international operations. These positive developments enabled TSN to announce a 10-cent special dividend and boost its regular quarterly dividend by 25%.

At this point, however, the stock doesn’t have enough upside to make chasing this rally worthwhile. A look at the 10-year chart tells the story: While Tyson has provided more than its share of opportunities to buy the dips, its overall performance has been a story of sideways motion and — thanks to its modest dividend — low shareholder returns:

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One of the most important reasons for the sluggish long-term results is that Tyson is a slow grower. While international expansion has enabled the company to capitalize on rising meat consumption in the developing countries through its operations in Brazil, China and India, among other regions, analysts still are calling for top-line growth of just 4.1% in the 2013 fiscal year and 3.4% in 2014, along with five-year EPS growth of 7.3%. At the same time, TSN shares are trading at their highest valuation in more than two years.

In light of this, it seems unlikely that Tyson stock will be able to sustain the current rally and break out above the $20-$21 level that has served as resistance on five occasions in the past three years.

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There’s no doubt that Tyson’s management is executing well and effectively guiding the company through a very challenging environment, and — perhaps most important — is demonstrating a willingness to return cash to shareholders. This represents a distinct improvement relative to the questionable performance of past management teams.

But history has shown that the time to buy Tyson is when it is under pressure, not when it’s already up more than 33% in less than four months. This is still a company whose fortunes are tied to commodity prices, after all.

Keep an eye on the stock to buy on a pullback, but for now, it’s a name that is better left alone.

As of this writing, Daniel Putnam did not hold a position in any of the aforementioned securities.